Payday loan services – Putting loan sharks out of business
Critics say the high fees that come with the loans send the jobless into a cycle of debt. The industry sees it as a service for people in need. We just call it a scam. Lenders are finding new and unusual ways to take advantage of desperate people.
The payday loan industry has found a new and lucrative source of business: the unemployed.
Payday lenders, which typically provide workers with cash advances on their paychecks, are offering the same service to those covered by unemployment insurance.
No job? No problem. A typical unemployed Californian receiving $300 a week in benefits can walk into one of hundreds of storefront operations statewide and walk out with $255 well before that government check arrives — for a $45 fee. Annualized, that’s an interest rate of 459%.
Critics of the practice, which has grown as the jobless rate has increased, say these pricey loans are sending the unemployed into a cycle of debt from which it will be tough to emerge.
Many payday clients pay off their loans and immediately take out another, or borrow from a second lender to pay off the first, and sink ever deeper into debt. Typical customers take out such loans about 10 times a year, by some estimates.
Lenders “market the product to give the illusion of assistance,” said Ginna Green, a spokeswoman for the advocacy group Center for Responsible Lending. “But instead of throwing them a life jacket they’re throwing them a cinder block.”
The industry sees it as a service, providing short-term loans to people who wouldn’t stand a chance with a conventional bank.
What’s clear is that in California, where the unemployment rate hit 12.4% in December, some jobless workers in need of quick cash are turning to payday lenders, regardless of cost.
Ed Reyes, a Los Angeles resident who lost his job in retail about six months ago, said he has had to take out payday loans three times since becoming unemployed. The advances on his government check, he said, have helped him pay his household bills before late charges accrue.
“To be honest, I didn’t know if they’d give me one, but they did,” he said, standing outside the unemployment benefits office in downtown Los Angeles.
Ignacio Rodrigues, a clerk at Van Nuys payday lender Ace Cash Express, said about a quarter of first-time borrowers he sees now use their unemployment checks as proof of income.
“They just need extra money, and we do it,” he said of the instant loans.
It’s legal. Payday lending is regulated by the state, but lenders are not required to check sources of income. A borrower needs only to have a bank account and valid identification to get a loan.
In California, close to 1.4 million jobless residents are getting unemployment benefits, out of a pool of some 2.3 million who are unemployed, according to the most recent numbers. Weekly benefits range from $40 to $450 and normally last a maximum of 26 weeks. But federal extensions signed into law during the recession have boosted the maximum duration for some workers to nearly two years.
With regular checks rolling in, the unemployed can be reliable borrowers for payday lenders. By law, the lenders can charge a $15 fee for every $100 borrowed. The maximum loan in California is $300 — which coincidentally is the just about the size of the average Golden State unemployment check.
The borrower leaves a postdated personal check to cover the loan and fee, which the lender can cash after about two weeks.
In California, the maximum annual interest rate allowed for these loans is 459%. APRs in other states are even higher: nearly 782% in Wyoming and 870% in Maine. The rates are blasted by critics. But Steven Schlein, a spokesman for payday lender trade group Community Financial Services Assn. of America, defended offering the loans to the unemployed, saying the critics don’t understand the realities of scraping by.
“Who are they to decide?” Schlein said. “We issue billions of dollars of credit. They issue platitudes and pats on the back.
“These people need money. They tell them to go to their relatives. These people have bills to pay. These people need to go to job interviews. They need credit.”
Schlein said just a fraction of the industry’s clientele is unemployed. Still, it’s good business.
Making payday loans to borrowers who receive unemployment benefits is not necessarily riskier than making other loans, he said, particularly in California, where benefits are relatively high. Default rates for loans made by the industry’s handful of public companies range from about 2.5% to 5%, Schlein said.
There were 2,385 licensed payday lenders in California as of 2008, according to the most recent report from the state Department of Corporations, which regulates the lenders. Nationwide, payday clients borrow an estimated $40 billion a year.
Payday lenders have been controversial since the industry expanded rapidly in the 1990s, with critics accusing the outfits of preying on the poor. Arkansas, Georgia, New Jersey and New York have virtually banned the institutions. In 2006, Congress stymied payday loans to military personnel, passing a law capping interest at rates prohibitively low for payday lenders. The legislation was spurred by concern that payday loan debt was affecting morale and readiness for deployment.
While California legislators capped the maximum loan amount, attempts to further regulate the industry — lowering the APR, for example — have foundered.
Some payday lenders refuse to lend to the unemployed.
At Papa Cash in Van Nuys, customers are welcomed with the motto “Where Papa always treats you like family.” But the store does not accept unemployment checks as proof of income.
“No EDD,” a clerk said through the glass, referring to the benefits distributed by the state Employment Development Department. “The checks can stop at any time.”
At a San Fernando Valley branch of payday behemoth Advance America, however, loans to the unemployed have increased in recent months, said a manager there who asked to remain anonymous because she was not authorized to speak for the company.
Most unemployed borrowers, she said, come in twice a month and often appear more desperate than other clients.
“They need it more,” she said. “When we tell them they need to wait because they forgot their checkbook or some other snag, you see a sadness in their eyes, kind of like it’s all piling up, the frustration.”
Still, the manager said she viewed her firm as providing a service that’s all the more vital in hard times.
“For an honest, hardworking family person, we can really help them get by until the next check,” she said. “It’s not for us to say they shouldn’t be getting a loan. That’s not our judgment.”
An unemployed borrower who gave his name only as Oscar exited Ace Cash Express in Van Nuys on a recent afternoon. He said he lost his job at a garden sprinkler installation company a year ago and has been depending on unemployment insurance ever since. He said he borrows against his benefit checks at payday loan stores to make ends meet.
“It helps me pay for food, for my apartment, other expenses,” he said in Spanish, tucking an envelope of cash into his worn jeans.